Economic Watch Shows China’s Economy is Stable

China’s rising M-M inflation and narrower decline in producer prices in August have provided fresh evidence of a steadying economy, experts said.

China’s consumer price index (CPI), a main gauge of inflation, rose 0.1% in August on a M-M basis, the National Bureau of Statistics (NBS) announced last Friday.

It grew 1.3% Y-Y in August, down from July’s 1.8%, largely due to eased food prices, according to NBS statistician Yu Qiumei.

The price of pork rose 6.4% Y-Y n August, slowing from a 16.1% rise in July.

The pace of August inflation was the slowest since October 2015 and marked a 4th consecutive monthly drop from 2.3% in April, when the CPI reached its highest mark since July 2014.

“However, the decline should not arouse particular concerns among economists as it was mostly caused by subdued food price inflation,” said Zhang Shuyu, a finance researcher with the University of International Business and Economics.

Since January 2016, CPI has been calculated using a new comparison base and includes more products and services, while slightly reducing the weighting of food, which accounts for about 33% of the China CPI.

China’s producer price index (PPI), which measures costs for goods at the factory gate, dropped 0.8% Y-Y in August, easing from a 1.7% decline registered in July, NBS data also showed. Yu attributed the milder decline to a low base in the same period last year.

“There is no immediate interest rate rise pressure as inflation remained benign,” said Zhang.

As China’s economy slowed and industrial overcapacity weighed on prices, the PPI has been negative for more than four years, but the pace of the decline is lessening, a positive sign for economic stabilization, according to Zhang.

In the 1st 8 months of the year, the PPI dropped 3.2% Y-Y, but on a M-M basis, August’s PPI edged up 0.2%.

Producer prices for ferrous metal smelting and rolling increased markedly faster in August to 6.5% Y-Y, while prices for nonferrous metal smelting and rolling returned to growth of 0.8%.

“Rising prices for both ferrous and nonferrous metal smelting and rolling may indicate that China’s drive to cut excess industrial capacity is starting to have some positive effects,” Zhang said.

Zhang said he believes broader CPI and PPI trends confirm recent signs of a more sure-footed recovery for the economy.

The import growth was a big surprise, said HSBC economist Julia Wang, noting that the domestic demand rebound was likely a result of infrastructure investment growth over the past few months.

Exports turned out better than expected in August as overseas demand stabilized to some extent, investment bank China International Capital Corp. (CICC) said in a research note, citing rebounding manufacturing activity in the UK and improved job data in the US.

In addition, depreciation of the RMB Yuan also helped lift exports, said Li Jian, a researcher with the Chinese Academy of International Trade and Economic Cooperation.

But looking ahead, the exchange rate of the RMB Yuan will remain largely stable in 2-H of Y 2016 and China is unlikely to seek competitive advantages via yuan devaluations, according to the CICC.

“The RMB’s inclusion in the IMF’s Special Drawing Rights (SDR) currency basket will come into effect in October. China is unlikely to allow drastic changes in its exchange rate to facilitate the transition, not to mention the G20’s commitment to avoiding competitive devaluations,” according to the CICC.

CICC researchers believe the expectation that China may devalue the RMB Yuan after SDR inclusion is a misconception, given the country needs to establish its credibility in consistent and transparent policy making as a new SDR currency issuer and the IMF’s 3rd-largest shareholder.

Exchange rate instability would also discourage investment and consumption for China, it said.

Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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